Marco Rubio: "It's the Debt, Not the Debt Ceiling!"

"The real problem here is not the debt LIMIT; the real problem here is the DEBT!" -- Florida Sen. Marco Rubio

CBO Warns of "Sudden Fiscal Crisis"

WASHINGTON (AP) — A new report says that the national debt is on pace to equal the annual size of the economy within a decade, levels that could provoke a European-style debt crisis unless policymakers in Washington can slam the brakes on spiraling deficits.
The Congressional Budget Office study released Wednesday offers a fresh reminder of what’s at stake in ongoing talks led by Vice President Joe Biden that are aimed at slashing more than $2 trillion from the federal deficit over the coming decade as the price for permitting the government to take on more debt to pay current obligations.
CBO says the nation’s rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax hikes.
“As Congress debates the president’s request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff – a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic,” said House Budget Committee Chairman Paul Ryan, R-Wis.
The findings aren’t dramatically new, but the CBO analysis underscores the magnitude of the nation’s fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations. The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid.
With the fiscal imbalance requiring the government to borrow more than 40 cents of every dollar it spends, CBO predicts that without a change of course the national debt will rocket from 69 percent of gross domestic product this year to 109 percent of GDP – the record set in World War II – by 2023.
Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government’s ability to respond to unexpected challenges like an economic downturn.
But most ominously, the CBO report warns of a “sudden fiscal crisis” in which investors would lose faith in the U.S. government’s ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, CBO warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.
“Earlier action would permit smaller or more gradual changes and would give people more time to adjust to them, but it would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations,” CBO Director Douglas Elmendorf said in a blog post.

David Stockman on Debt: "We've Run Out of Runway"

Regarding deficits created during the Reagan presidency:

"The essential distinction is that we had a clean balance sheet then - $1 trillion of national debt. Today we have $14 trillion in national debt.  We have used up all the runway, so to speak."

"We have piled our national balance sheet with so much debt that the government is at the very edge of a huge solvency crisis that isn't going to be addressed unless both parties dramatically change their position, and I see no sign of it.  So we're going to have a gong show. Year after year after year of these debt ceiling crises, maybe they will be solved for a month or two, and then we will go right to the next."

Rep. Paul Ryan: "Catastrophic Trajectory" and Shared Scarcity or Renewed Prosperity

Economic Club of Chicago Remarks as Prepared for Delivery by Paul Ryan
May 16, 2011
Thank you so much, Anne, for the kind introduction.
I want to thank you all for inviting me to speak. It was especially gracious of you to host me, even though I’m a Packers fan and I assume most of you are Bears fans.
But that doesn’t mean we can’t work together. As chairman of the House Budget Committee, I stand ready to do whatever it takes to help you re-sign Jay Cutler.
I’m here to talk about the economy today – about the need to get four quarters of strong, consistent performance.
That wasn’t another Jay Cutler joke, I swear. It could be, but it’s not.
I’ll come to the point. Despite talk of a recovery, the economy is badly underperforming. Growth last quarter came in at just 1.8 percent. We’re not even creating enough jobs to employ new workers entering the job market, let alone the six million workers who lost their jobs during the recession.
The rising cost of living is becoming a serious problem for many Americans. The Fed’s aggressive expansion of the money supply is clearly contributing to major increases in the cost of food and energy.
An even bigger threat comes from the rapidly growing cost of health care, a problem made worse by the health care law enacted last year.
Most troubling of all, the unsustainable trajectory of government spending is accelerating the nation toward a ruinous debt crisis.
This crisis has been decades in the making. Republican administrations, including the last one, have failed to control spending. Democratic administrations, including the present one, have not been honest about the cost of the tax burden required to fund their expansive vision of government. And Congresses controlled by both parties have failed to confront our growing entitlement crisis. There is plenty of blame to go around.
Years of ignoring the drivers of our debt have left our nation’s finances in dismal shape. In the coming years, our debt is projected to grow to more than three times the size of our entire economy.
This trajectory is catastrophic. By the end of the decade, we will be spending 20 percent of our tax revenue simply paying interest on the debt – and that’s according to optimistic projections. If ratings agencies such as S&P move from downgrading our outlook to downgrading our credit, then interest rates will rise even higher, and debt service will cost trillions more.
This course is not sustainable. That isn’t an opinion; it’s a mathematical certainty. If we continue down our current path, we are walking right into the most preventable crisis in our nation’s history.
So the question is, how do we avoid it?
The answer is simple. We have to make responsible choices today, so that our children don’t have to make painful choices tomorrow.
If you look at what’s driving our debt, the explosive growth in spending is the result of health care costs spiraling out of control.
By the time my children are raising families of their own, literally every dollar we raise in revenue will be paying for three major entitlement programs.
Some of this is demographic – every day, ten thousand baby boomers retire and start collecting Medicare and Social Security.
But a lot of it is simply due to the fact that health care costs are rising faster than the economy is growing. Revenues simply cannot keep up.
It’s basic math – we cannot solve our fiscal or economic challenges unless we get health care costs under control.
The budget passed by the House last month takes credible steps to controlling health care costs. It aims to do two things: to put our budget on a path to balance, and to put our economy on a path to prosperity.
I am here today to stress the point that these goals go hand in hand. Stable government finances are essential to a growing economy, and economic growth is essential to balancing the budget.
The name of our budget is The Path to Prosperity.
See, right now, we’re finally having a debate in Washington about how to address our fiscal problems. But we’re still not having the debate we need to have.
To an alarming degree, the budget debate has degenerated into a game of green-eyeshade arithmetic, with many in Washington – including the President – demanding that we trade ephemeral spending restraints for large, permanent tax increases.
This sets up a debate in which we are really just arguing over who to hurt and how best to manage the decline of our nation. It is a framework that accepts ever-higher taxes and bureaucratically rationed health care as givens.
I call it the “shared scarcity” mentality. The missing ingredient is economic growth.
Shared scarcity represents a deeply pessimistic vision for the future of this country – one in which we all pay more and we all get less. I believe it would leave us with a nation that is less prosperous and less free.
To begin with, chasing ever-higher spending with ever-higher tax rates will decrease the number of makers in society and increase the number of takers. Able-bodied Americans will be discouraged from working and lulled into lives of complacency and dependency.
Worse – when it becomes obvious that taxing the rich doesn’t generate nearly enough revenue to cover Washington’s empty promises – austerity will be the only course left. A debt-fueled economic crisis will force massive tax increases on everyone and indiscriminate cuts on current beneficiaries – without giving them time to prepare or adjust. And, given the expansive growth of government, many of these critical decisions will fall to bureaucrats we didn’t elect. 
Shared scarcity impedes economic growth, results in harsh austerity, and ends with lost freedom. 
In a recent speech he gave in response to our budget, President Obama outlined a deficit-reduction approach that, in my view, defines shared scarcity. The President’s plan begins with trillions of dollars in higher taxes, and it relies on a plan to control costs in Medicare that would give a board of 15 unelected bureaucrats in Washington the power to deeply ration care. This would disrupt the lives of those currently in retirement and lead to waiting lists for today’s seniors.
Now in criticizing the President’s policies, I should make clear that I am not disputing for a moment that he inherited a difficult fiscal situation when he took office. He did.
Millions of American families had just seen their dreams destroyed by misguided policies and irresponsible leadership that caused a financial disaster. The crisis squandered the nation’s savings and crippled its economy.
The emergency actions taken by the government in the fall of 2008 did help to arrest the ensuing panic. But subsequent interventions – such as the President’s stimulus law and the Fed’s unprecedented monetary easing – have done much more harm than good, in my judgment.
In the aftermath of the crisis, we needed government to repair the free-market foundations of the American economy, as it did under Reagan in the early 1980s, by restraining spending… keeping taxes low… enforcing reasonable, predictable regulations… and protecting the value of the dollar.
Instead, leaders in Washington embarked on an unprecedented spending spree… enacted a deeply flawed overhaul of financial rules… passed a new health care law that raised taxes by $800 billion… and encouraged a sharp departure from a rules-based monetary policy, which created even more economic uncertainty. 
In the 2010 election, the voters sent a message: This isn’t working. Washington needs to try something else.
We know what that something else must be, because we know what has always made growth possible in America. We need to answer that call for new economic leadership by getting back to the four foundations of economic growth:
First, we have to stop spending money we don’t have, and ultimately that means getting health care costs under control.
Second, we have to restore common sense to the regulatory environment, so that regulations are fair, transparent, and do not inflict undue uncertainty on America’s employers.
Third, we have to keep taxes low and end the year-by-year approach to tax rates, so that job creators have incentives to invest in America; and
Fourth, we have to refocus the Federal Reserve on price stability, instead of using monetary stimulus to bail out Washington’s failures, because businesses and families need sound money.
Let me deal with each in order.
The first foundation, real spending discipline: it’s pretty simple. You can’t get real, sustainable growth by continuing to pile on the debt. More debt means more uncertainty, and more uncertainty means fewer jobs.
The rating agency S&P just downgraded the outlook on U.S. debt from “stable” to “negative.” That sends a signal to job creators. If S&P is telling them that America is a bad investment, they’re not going to expand and create jobs in America – not at the rate we need them to.
Mounting debt also threatens our poorest and most vulnerable citizens, because those who depend most on government would be hit hardest by a fiscal crisis. We have to repair our safety net programs so that they are there for those who need them most. This starts by building on the successful, bipartisan welfare reforms of the mid-1990s.
Our reforms save the social safety net by giving more power to governors to create strong, flexible programs that better serve the needs of their populations. Most important, they make these programs solvent. 
As we strengthen welfare for those who need it, we propose to end it for those who don’t. We end wasteful corporate welfare for those such as Fannie Mae and Freddie Mac, big agribusinesses, and others that have gotten a free ride from the taxpayer for too long.
All of these steps are necessary to getting spending under control. But they are not enough. We cannot avert a debt crisis unless we directly address the rising cost of health care.
Getting health care costs under control is critical, both for solving our fiscal mess and for promoting growth. One reason that many people aren’t getting raises is that rising health care costs are eating into their paychecks.
The second foundation addresses the growing scourge of crony capitalism, in which Washington bureaucrats abuse the regulatory process to pick winners and losers in the private economy.
Congressional Republicans continue to advance reforms that stop regulatory bureaucrats from strangling job growth and innovation with red tape. We’ve advanced legislation to stop the EPA from imposing job-destroying energy caps on American businesses.
We’ve advanced legislation to revisit the flawed Dodd-Frank law, which actually intensifies the problem of too-big-to-fail by giving large, interconnected financial institutions advantages that small firms do not enjoy.
But most important, we propose to repeal the new health care law and its burdensome maze of new regulations. It’s bad enough that the law imposes an unconstitutional mandate on every American; it also imposes new regulations on businesses, which are stifling job creation.
Let me share with you a figure that serves as a devastating indictment of the new health care law: So far, over 1,000 businesses and organizations have been granted waivers from the law’s onerous mandates. These waivers may prevent job losses now, but they do not guarantee relief in the future, nor do they help those firms that lack the connections to lobby for waivers.
This is no way to create jobs in America. True, bipartisan health care reform starts by repealing this partisan law.
The third foundation recognizes that we cannot get our economy back on track if Washington tries to tax its way out of this mess.
The economics profession has been really clear about this – higher marginal tax rates create a drag on economic growth.
As the University of Chicago’s John Cochrane recently wrote: “No country ever solved a debt problem by raising tax rates. Countries that solved debt problems grew, so that reasonable tax rates times much higher income produced lots of tax revenue. Countries that did not grow inflated or defaulted.”
Higher taxes are not the answer.
Finally, the fourth foundation calls for rules-based monetary policy to protect working families and seniors from the threat of high inflation.
The Fed’s recent departures from rules-based monetary policy have increased economic uncertainty and endangered the central bank’s independence.
Advocates of these aggressive interventions cite the “maximum employment” aspect of the Fed’s dual mandate – its other mandate being price stability.
Congress should end the Fed’s dual mandate and task the central bank instead with the single goal of long-run price stability. The Fed should also explicitly publish and follow a monetary rule as its means to achieve this goal.
These are our four foundations of economic growth. And the House-passed budget starts the long, arduous, and necessary process of restoring these foundations and building a prosperous future.
We lift the crushing burden debt by cutting spending and reforming those government programs that drive the debt. We reduce the deficit by over a third in the first year of our budget, putting an end to the era of trillion-dollar deficits. The House-passed budget doesn’t just put the budget on a path to balance – it actually pays off the debt over time.
We can’t achieve this goal by simply rubber-stamping increases in the national debt limit without reducing spending in Washington.
Speaker Boehner made this clear in a recent speech at the Economic Club of New York: If the debt ceiling has to be raised, then we’ve got to cut spending. The House-passed budget contained $6.2 trillion in spending cuts. For every dollar the President wants to raise the debt ceiling, we can show him plenty of ways to cut far more than a dollar of spending. Given the magnitude of our debt burden, the size of the spending cuts should exceed the size of the President’s debt limit increase.
The House-passed budget also gets health care spending under control by empowering Americans to fight back against skyrocketing costs. Our budget makes no changes for those in or near retirement, and offers future generations a strengthened Medicare program they can count on, with guaranteed coverage options, less help for the wealthy, and more help for the poor and the sick. 
There is widespread, bipartisan agreement that the open-ended, fee-for-service structure of Medicare is a key driver of health-care cost inflation. As my friend Jim Capretta, a noted health-care policy expert, likes to say, Medicare is not the train being pulled along by the engine of rising costs. Medicare is the engine – and the rest of us are getting taken for a ride.
The disagreement isn’t really about the problem. It’s about the solution to controlling costs in Medicare. And if I could sum up that disagreement in a couple of sentences, I would say this: Our plan is to give seniors the power to deny business to inefficient providers. Their plan is to give government the power to deny care to seniors.
We also disagree about how best to deliver the tax reform that Americans have long demanded from Washington.
Here’s a quick story about tax policy. Twenty-five years ago, GE CEO Jack Welch introduced himself to this very club by saying, “I represent a company that doesn’t pay taxes.”
I guess some things never change. 
We have to broaden the tax base, so corporations cannot game the system. The House-passed budget calls for scaling back or eliminating loopholes and carve-outs in the tax code that are distorting economic incentives. 
We do this, not to raise taxes, but to create space for lower tax rates and a level playing field for innovation and investment. America’s corporate tax rate is the highest in the developed world. Our businesses need a tax system that is more competitive.
A simpler, fairer tax code is needed for the individual side, too. Individuals, families, and employers spend over six billion hours and over $160 billion per year figuring out how to pay their taxes. It’s time to clear out the tangle of credits and deductions and lower tax rates to promote growth.
The House-passed budget does that by making the tax code simpler… flatter… fairer… more globally competitive… and less burdensome for working families and small businesses.
By contrast, the President says he wants to eliminate deductions, but he also wants to raise rates. That includes raising the top rate to 44.8 percent. That would amount to a $1.5 trillion tax increase on families and job creators.
The President says that only the richest people in America would be affected by his plan… Class warfare may be clever politics, but it is terrible economics. Redistributing wealth never creates more of it.
Further, the math is clear – the government cannot close its enormous fiscal gap simply by taxing the rich. This gap grows by trillions of dollars each year, representing tens of trillions in unfunded promises to future generations that the government has no plan to keep.
There’s a civic side to this as well. Sowing social unrest and class envy makes America weaker, not stronger. Playing one group against another only distracts us from the true sources of inequity in this country – corporate welfare that enriches the powerful, and empty promises that betray the powerless.
Those committed to the mindset of “shared scarcity” are telling future generations, sorry, you’re just going to have to make do with less. Your taxes will go up, because Washington can’t get government spending down.
They are telling future generations, you know, there’s just not much we can do about health care costs. Government spending on health care is going to keep going up and up and up… and when we can’t borrow or tax another dollar, we’ll have to give a board of unelected bureaucrats the power to tell you what kind of treatments you can and can’t receive.
If we succumb to this view that our problems are bigger than we are – if we surrender more control over our economy to the governing class – then we are choosing shared scarcity over renewed prosperity, and managed decline over economic growth.
That’s the real class warfare that threatens us – a class of governing elites picking winners and losers, and determining our destinies for us.
We face a choice between two futures. We can continue to go down the path toward shared scarcity, or we can choose the path of renewed prosperity.
The question before us is simple: Which path will our generation choose?
In 1979, my mentor, Jack Kemp, captured the essence of why we must choose the path to prosperity:
“We can’t progress as a society by using government to diminish one another. The only way we can all have more is by producing more, not by bickering over how to share less. Economic growth must come first… for when it does many social problems tend to take care of themselves, and the problems that remain become manageable.”
You know, there’s a question I get a lot from people at town halls. When you go around the country showing people a chart that shows that our debt is on track to cripple our economy, people start to ask you whether any plan, even a plan like the House-passed budget, can save America from a diminished future.
They say, Congressman Ryan, I know you have to sound optimistic in public. But in private, do you really think there’s anything we can do to save this country from fiscal ruin? Or should we just be bracing for the worst?
It’s a difficult question. It’s one that gives me pause. Frankly, it’s one that keeps me up at night.
But the honest answer is the one I’m about to give to you: Nobody ever got rich betting against the United States of America, and I’m not about to start.
Time and again, just when it looked like the era of American exceptionalism was coming to a close… we got back up. We brushed ourselves off. And we got back to work – rebuilding our country, advancing our society, and moving the boundaries of opportunity ever forward.
We can do it again. America was knocked down by a recession. We are threatened by a rising tide of debt. But we are not knocked out. We are America. And it is time to prove the doubters wrong once more – to show them that this exceptional nation is once again up to the challenge. 
Thank you.

David Walker: Seeking to Restore Fiscal Health of the United States

By: Hon. David M. Walker, Founder and CEO of the Comeback America Initiative and Former Comptroller General of the United States (1998-2008)

Two hundred and twenty two years ago, the American Republic was founded. The United States had defeated the world’s most powerful military force to win independence, and over a several year period, went about creating a federal government based on certain key principles, including limited government, individual liberty, and fiscal responsibility. That government was established by what is arguably the world's greatest political document - the United States Constitution.
Our nation's founders understood the difference between opportunity and entitlement. They believed in certain key values including the prudence of thrift, savings and limited debt. They took seriously their stewardship obligation to the country and future generations of Americans.
The truth is, we have strayed from these key, time-tested principles and values in recent decades. We must return to them if we want to keep America great and help to ensure that our future is better than our past.
Believe it or not, to win our independence and achieve ratification of the U.S. Constitution, the U.S. only had to go into total federal and state debt equal to 40 percent of the size of its then fledgling economy. Fast forward to today, when the U.S. is the largest economy on earth and a global superpower – but total federal debt alone is almost 100 percent of the economy and growing rapidly. Add in state and local debt, and the total number is about three times as much as the total debt we held at the beginning of our Republic – and it is headed up rapidly. As the below graphic shows, our total federal debt has more than doubled in just the past ten and a half years.

America has gone from the world's leading creditor nation to the world's largest debtor nation. We have also become unduly dependent on foreign nations to finance our excess consumption. Many of these foreign investors have shunned our long-term debt due to concerns over future interest rates and the longer-term value of the dollar. And PIMCO, the largest Treasury bond manager in the U.S., also recently sold their Treasury security holdings due to a lack of adequate return for the related interest rate risk.
And who is now the largest holder of Treasury securities? It's the Federal Reserve. I call that self-dealing. The Fed may be able to hold down interest rates for a period of time; however, they cannot hold them down forever. The Fed's debt purchase actions are just another example of how Washington policymakers take steps to provide short-term gain while failing to take steps to avoid the longer-term pain that will surely come if we fail to put our nation's fiscal and monetary policies in order.

The Fiscal Fitness Index

In March 2011 the Comeback America Initiative (CAI) and Stanford University released a new Sovereign Fiscal Responsibility Index (SFRI) - or as my wife Mary refers to it, a Fiscal Fitness Index. We calculated each country’s SFRI based on three factors – fiscal space, fiscal path, and fiscal governance.
Fiscal space represents the amount of additional debt a country could theoretically issue before a fiscal crisis is imminent. Fiscal path is an estimate of the number of years before a country will hit its theoretical maximum debt capacity. (The U.S. will hit its maximum within16 years, but will enter a “fiscal danger zone” within 2-3 years). Fiscal governance is a value based on the strength of a government’s institutions, as well as its transparency and accountability to its citizens. Unfortunately, the U.S. ranks far below the average in all three of these categories – in particular, the fiscal governance category.
The overall SFRI index showed that the U.S. ranked 28 out of 34 nations in the area of fiscal responsibility and sustainability. And when you see which countries rank around us, it's clear that we’re in a bad neighborhood. We’re only a few notches above countries like Greece, Ireland, and Portugal, all of which have recently suffered severe debt crises. That report also showed that the U.S. could face a debt crisis as soon as two to three years from now, given our present path and interest rate risk. Below is the full list of rankings.

On the positive side, the CAI and Stanford report showed that if Congress and the President were able to work together to pass fiscal reforms that were the "bottom line" fiscal equivalent of those recommended by the National Fiscal Responsibility and Reform Commission last year, our nation's ranking would improve dramatically, to number 8 out of 34 nations. In addition, we would achieve fiscal sustainability for over 40 years!
So what are our elected officials waiting for? Do they want a debt crisis to force them to make very sudden and possibly draconian changes? If not, they need to wake up and work together to make tough choices. That’s what New Zealand did in the early 1990s, when that country faced a currency crisis. Due to tough choices then and persistence over time, New Zealand now ranks number 2 in the SFRI - second only to Australia, which the Kiwis are not happy about! If New Zealand can do it, America can too!

The Recent Budget Policy Proposals

In order for us to begin to restore fiscal sanity to this country, President Obama has to discharge his leadership responsibilities as CEO of the United States Government. He got into the game with his fiscal speech on April 13, in which he largely embraced the work of his National Fiscal Responsibility and Reform Commission, although with a longer timeframe for implementation and less specifics on entitlement reforms. The President also endorsed the debt/GDP trigger and automatic enforcement concept that CAI had been advocating. Under this concept, Congress could agree on a set of statutory budget controls that would come into effect in fiscal 2013. Such controls should include specific annual debt/GDP targets with automatic spending cuts and temporary revenue increases in the event the annual target is not met. In my view, a ratio of three parts spending cuts, excluding interest savings, to one part revenue would make sense.
House Budget Committee Chairman Paul Ryan recently demonstrated the political courage to lead in connection with our nation's huge deficit and debt challenges. His budget proposal recognizes that restoring fiscal sustainability will require tough transformational changes in many areas, including spending programs and tax policies. Chairman Ryan's proposal includes several major reform proposals, especially in the area of health care. For example, he proposes to convert Medicare to a premium support model that will provide more individual choice, limit the government's long-term financial commitment and focus government support more on those who truly need it. He also proposed to employ a block grant approach to Medicaid in order to provide more flexibility to the states and limit the governments' financial exposure. These concepts have varying degrees of merit; however, how they are designed and implemented involve key questions of social equity that need to be carefully explored. And contrary to Chairman Ryan’s proposal, additional defense and other security cuts that do not compromise national security and comprehensive tax reform that raises more revenue as compared to historical levels of GDP also need to be on the table in order to help ensure bipartisan support for any comprehensive fiscal reform proposal.
The President and Congressional leaders should be commended for reaching an agreement that averted a partial shutdown of the federal government and resolved funding levels for fiscal 2011. While it took way too much time and effort, this compromise involved real concessions from both sides and represents a small yet positive step towards restoring fiscal responsibility. But this action is far from the most important fiscal challenge facing both the Congress and the President. After all, Washington policymakers took about 88 percent of federal spending, along with much-needed federal tax reforms, "off the table" during the recent debate over the 2011 budget. In essence, they have been arguing over the bar tab on the Titanic when we can see the huge iceberg that lies ahead. The ice that is below the surface is comprised of tens of trillions of dollars in unfunded Medicare, Social Security and other off-balance sheet obligations along with other commitments and contingencies that could sink our "Ship of State". It is, therefore, critically important that we change course before we experience a collision that could have catastrophic consequences. As you can see in the series of pie charts below, mandatory programs like Social Security and Medicare already take up the largest share of the federal budget and, absent a change in course, will continue to do so in increasing amounts in the next several decades.

The Federal Debt Ceiling Limit

Now that the level of federal funding for the 2011 fiscal year has been resolved, there has been an increasing amount of attention on Congress’ upcoming vote to increase the federal debt ceiling limit. As is evident by the chart below detailing the debt ceiling limit per capita adjusted for inflation since 1940, the U.S. started losing its way in the early 1980s. Fiscal responsibility was temporarily restored during the 1990s, when statutory budget controls were in place, but things went out of control again in 2003, the year after those budget controls expired.

In essence, raising the debt ceiling is simply recognizing the federal government’s past fiscally irresponsible practices. But while federal law provides for the continuation of essential government operations even if the government has not decided on a budget or funding levels for a fiscal year, such a provision does not exist in connection with the debt ceiling. Therefore, if the federal government hits the debt ceiling during a time of large deficits, which is the case today, dramatic and draconian actions will have to be taken to ensure that additional debt is not incurred. This would likely include a suspension of payments to government contractors, delays in tax refunds, and massive furloughs of government employees. In addition, since Social Security is now paying out more in benefits than it receives in taxes, the monthly payments may not go out on time if we hit the debt ceiling limit. That would clearly get the attention of tens of millions of Americans, including elected officials.
However, although failure to raise the debt ceiling is not a viable option given our current fiscal state, we must take concrete steps to address the government’s lack of fiscal responsibility. We must also do so in a manner that avoids triggering a massive disruption and a possible loss of confidence by investors in the ability of the federal government to manage its own finances. Such a loss of confidence could spur a dramatic rise in interest rates that would further increase our nation's fiscal, economic, unemployment and other challenges.
In order to begin to restore fiscal sanity, Congress could increase the debt ceiling limit in exchange for one or more specific steps designed to send a signal to the markets, and the American people, that a new day in federal finance is dawning. To be credible, any such action must go beyond short-term spending cuts for the 2012 fiscal year. The debt/GDP trigger and automatic enforcement concepts I advocate above are one specific step Congress could take.
The S&P's revised outlook on the long-term rating for U.S. sovereign debt should be yet another wake-up call for elected officials and other policymakers in Washington. S&P's action serves as a market-based signal that independent ratings agencies believe the U.S. is on an imprudent and unsustainable fiscal path and that action is needed in order to maintain investor confidence. In my view, this action should have been taken place some time ago; however, it is now likely that other rating agencies will reconsider their ratings positions on U.S. Sovereign debt.

Moving Past Partisan Politics

The American people need to understand that doing nothing to address our deteriorating financial condition and huge structural deficits is simply not an option. Failure to act will serve to threaten America's future position in the world and our standard of living at home. Therefore, both major political parties must come to the table and put aside their sacred cows and unrealistic expectations. As John F. Kennedy said, “The great enemy of the truth is very often not the lie — deliberate, contrived and dishonest — but the myth — persistent, persuasive, and unrealistic.”
Given President Kennedy's admonition, liberals need to acknowledge that we need to renegotiate the current social insurance contract. For example, contrary to assertions by some, Social Security is now adding to the federal deficit and is underfunded by about $8 trillion. As you can see below, it will face escalating annual deficits beginning in 2015.

There is no debate that last year's health care reform legislation will result in higher federal health care costs as a percentage of the economy. (See the chart below). In addition, according to Medicare's independent Chief Actuary, based on reasonable and sustainable assumptions, last year's health care reform legislation will end up exacerbating our deficit and debt challenges rather than helping to lessen them. He estimated that the cost of the health care law to the Medicare program could be over $12 trillion in current dollars more than advertised.

Conservatives need to acknowledge that we can't just grow our way out of our fiscal hole. They need to admit that all tax cuts are not equal and there is plenty of room to cut defense and other security spending without compromising our national security. And while conservatives are correct to say that our nation's fiscal challenge is primarily a spending problem, they must recognize that some additional revenues will be needed to restore fiscal sanity. The math just doesn't work otherwise.
All parties must acknowledge that we can't inflate our way out of our problem and that we must take steps to improve our nation's competitive posture. This means that some properly targeted and effectively implemented critical infrastructure and other investments may be both needed and appropriate even if they exacerbate our short-term fiscal challenge.
Washington policymakers need to understand that the same four factors that caused the recent financial crisis exist for the federal government's own finances. And what are those factors?
First, a disconnect between those who benefit from prevailing policies and practices and those who will pay the price and bear the burden if and when the bubble bursts. Second, a lack of adequate transparency and accountability in connection with the true financial risks that we face. Third, too much debt, not enough focus on cash flow, and an over-reliance on narrow and myopic credit ratings. Finally, a failure of responsible parties to act until a crisis was at the doorstep.
There is growing agreement that the greatest threat to our nation's future is our own fiscal irresponsibility. In fact, as I noted in 2007 and Joint Chiefs Chairman Admiral Mullin stated last year, our fiscal irresponsibility and resulting debt is a national security issue. After all, if you don't keep your economy strong for both today and tomorrow, America's standing in the world and standard of living at home will both suffer over time – and waiting for a crisis before we act could also undermine our domestic tranquility.

So where should Washington go from here?

First, Congress and the President should reach a compromise agreement on an appropriate level of spending cuts in 2012 while also providing for some additional properly designed and effectively implemented critical infrastructure investments. Second, they should agree to re-impose tough statutory budget controls that will force much tougher choices on both the spending and tax side of the ledger beginning no later than 2013. Third, they should authorize and fund a national citizen education and engagement effort to help prepare the American people for the needed actions and to facilitate elected officials taking them without losing their jobs. Fourth, they should create a credible and independent process that will provide for a baseline review of major federal organizational structures, operational practices, policies and programs in order to make a range a transformational recommendations that will make the federal government more future focused, results oriented, successful and sustainable.
Spending levels certainly need to be cut. After all, the base levels of federal discretionary spending increased by over 30 percent between 2007 and 2010 during a time of low inflation. At the same time, all parties must be realistic regarding how much should be cut and how quickly it can be achieved. In my view, we should be targeting greater cuts than have been recently considered, but over a longer period of time: for example, real spending cuts of $125-$150 billion over several years. If we did so, the related savings would be significant and would compound over time.
As the National Fiscal Responsibility and Reform Commission, CAI, The No Labels political movement (of which I am a co-founder), and others have noted, everything must be on the table – and all political leaders need to be at the table – in order to put our nation on a more prudent and sustainable fiscal path. This includes a range of social insurance program reforms, defense and other spending cuts, and comprehensive tax reform that generates additional revenues, including both individual and corporate tax reform. We must keep in mind that the private sector is the engine of innovation, growth, and jobs. In addition, many businesses are taxed at the individual, rather than the corporate, level.
Realistically, it will take us a number of years to get back into fiscal shape. And while it would be great if we could do a "grand bargain" and enact a broad range of transformational reforms in one step, that just isn't realistic in today's world. Therefore, what is a reasonable order of battle to win the war for our fiscal future?
First and foremost we need to enact budget process reforms, re-impose the type of budget controls and engage in the fact-based citizen education and engagement effort referred to previously. The next order of battle items should be corporate tax reform and Social Security reform. Why corporate tax reform? Because it can help to improve our competitiveness, enhance economic growth and generate jobs.
And why Social Security reform? Because we have a chance to make this important social insurance program solvent, sustainable and secure for both current and future generations. We can also exceed the expectations of all generations and demonstrate to both the markets and the American people that Washington can act before a crisis forces it too.
The above efforts should be followed by broader tax reform and Medicare/Medicaid reforms. We will then need to rationalize our health care promises and focus more on reducing health care costs in another round of health care legislation. We must also begin a multi-year effort to re-baseline the federal government's organizations, operations, programs and policies to make them more future focused, results oriented, affordable and sustainable.
In summary, the truth is that the government has grown too big, promised too much and waited too long to restructure. Our fiscal clock is ticking and time is not working in our favor. The Moment of Truth is rapidly approaching. As it does, let us hope that our elected officials must keep the words of Theodore Roosevelt in mind: “In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” And "We the People" must do our part by insisting on action and by making the price of doing nothing greater than the price of doing something We must insist that our legislators offer specific solutions to defuse our ticking debt bomb in a manner that is economically sensible, socially equitable, culturally acceptable, and politically feasible We need to recognize that improving our fiscal health, just like our physical health, will require some short-term pain for greater long-term gain. The same is true for state and local governments.
We'll soon know whether Washington policymakers are up to the challenge and whether they will start focusing more of doing their job than keeping their job. They need to focus first on their country rather than their party. And yes, the President and Congressional leaders from both political parties need to be at the table and everything must be on the table in order to achieve sustainable success. Let's hope they make the right choice this time!
All of us who are involved with the Comeback America Initiative (CAI) will do our part. All that we ask is that you do yours. The future of our country, communities and families depends on it.
For more information about the Comeback America Initiative and No Labels, check out www.tcaii.org and www.nolabels.org.

Wall Street Goes Begging, Er, Demanding!

Wall Street can't bear the thought that the gravy train from taxpayers to them may soon end. If is doesn't end now, it will end soon when the entire financial system collapses.
2011 US debt growth -- 12%
2011 US economic growth - 2%
That math adds up to one thing -- disaster!

from CNBC: 
A group of the largest US banks and fund managers stepped up the pressure on Congress and the Obama administration to reach a deal to increase the country’s debt limit, saying that even a short default could be devastating for the financial markets and economy.

The warning over the debt limit is the strongest yet to come from Wall Street, highlighting growing nervousness among investors about the US political system’s ability to forge a consensus on fiscal policy.

The most pressing budgetary issue confronting Congress and the Obama administration is the need to raise the US debt ceiling, which stands at $14,300 billion.

That threshold will be reached by May 16 and the Treasury department has said that in the absence of congressional action, the world’s largest economy could default by early July.

Although such a scenario is still likely to be avoided, the looming deadline is stoking concerns within the financial industry.

“Any delay in making an interest or principal payment by Treasury even for a very short period of time would put the US Treasury and overall financial markets in uncharted territory and could trigger another catastrophic financial crisis,” said Matthew Zames, a JPMorgan executive, in a letter to Tim Geithner, the Treasury secretary, this week.

The Case Against Government Debt

This from Zero Hedge and The-Privateer:


The most exciting episode of the neverending (and always distracting from far more important matters) political soap opera is without doubt the ongoing debate over the debt ceiling (which may legally be breached as soon as the week of May 1). For what it's worth, this is a complete sideshow as i) the ceiling will be raised, ii) both parties will blame each other for this outcome while shaking hands behind the scenes in expectation of more "gifts" from Wall Street and iii) the world will realize just how broke America is now that its debt ceiling, which we believe will be raised by just over $2 trillion to last the country until after the next presidential election, will for the first time ever be greater than its GDP, an event that has never before occurred. And so the distraction will shift to another even more meaningless debate. In the meantime, few ask themselves the key question: why is there government debt? In that regard, many have made the point against government debt, but few have done so as successfully and as succinctly as Bill Buckler does in his latest issue of the Privateer. In the below segment, Buckler does the definitive and most commonsensical reduction of the "government debt" issue and why what America is doing is nothing short of allowing itself to be hijacked on the road to a dictatorship.

The Case Against Government Debt - PERIOD:

A debt is an unfinished TRANSACTION. It is an agreement voluntarily entered into by BOTH lender and borrower to exchange present goods for future goods. Any economic transaction presupposes the existence of the goods being exchanged. If no goods exist, no transaction can take place.

In the marketplace, a loan is successful for the lender if and when the terms of the loan are met in full by the borrower. It is successful for the borrower if and when he can fulfill the terms and stand with capital  left over afterwards. If the terms of the loan are not fulfilled, both lender and borrower lose. The lender loses part or perhaps all of what was lent. The borrower may end up in jail. At the very least, he will findit more difficult or impossible to borrow in future.

In the “private” world of the marketplace, the lender has no power to create what is lent out of thin air and the borrower has no power to create the means of “payment” using the same method. The goods or money must first be created or earned and then SAVED. The means of paying back the loan must be acquired the same way. In all cases of MARKET lending, force cannot enter the picture. There is no way to force anyone to accept a “legal tender” which settles “all debts public and private”.

A government produces NOTHING. Since it produces nothing, it has no ECONOMIC means of servicing or repaying any debt obligations it may take on. Its means are strictly “political”. The only way a government can service and repay ANY level of debt it takes on is to extract the means from those who do produce wealth. Those who rely on the “full faith and credit” of government are relying on the exercise of naked political POWER. They are relying on the government to extract the means of payment from its citizens - or - to manipulate the terms of the loan (usually by manipulating interest rates) - or - to depreciate the purchasing power of the “legal tender” to make “payment” possible. In reality, government “creditors” are relying upon all three methods. The key to any government’s power is its ability to consume more than it extracts in taxes and charges. Until that power is curbed, no solution to the global financial crisis is possible. Until it is abolished, no return to genuine political freedom is possible.

We hope that more Americans realize that this is the key, and only, issue. Not whether Geithner can issue another $35 billion in 3 Year notes all of which will ultimately end up going to pad the uber rich's pocket even more. Not even whether America has a AAA or DD rating. It is whether we are willing to give up, day by day, the key freedom that once upon a time made America the great countries that future generations will only read about in history books.